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Here is One Reason for the Single-Family Rental Boom

Tight credit, a demand-side constraint, has often been cited as a major obstacle for first-time homebuyers in the post-crisis housing market. Recently, however, more attention has been focused on tight inventory, a supply-side constraint, as a major impediment to first-time buyers entering the housing market.

One reason why there are fewer starter homes available for purchase is that many of them are shifting or have shifted from owner-occupied to rentals, according to Fannie Mae’s Economic & Strategic Research (ESR) group’s latest Housing Insights report. Fannie Mae defines a starter home as a single-family detached unit with a floor area of less than 2,000 square feet.

Between 2005, which was approximately the peak of the housing boom, and 2013, the latest year for which data is available, the supply of owner-occupied starter homes declined by 1 million while the supply of renter-occupied starter homes increased by 2 million. During that eight-year period, starter homes made up approximately two-thirds of the growth of the single-family rental market.

Further contributing to the shortage of single-family starter homes available for sale was the fact that new construction was not adding enough homes to make up for the loss of the homes that shifted to the rental market. At the peak of the bubble in 2005, approximately 650,000 detached single-family units that qualify as starter homes were built; six years later, after the bust, only 200,000 such homes were built, with no signs of improving soon, according to Fannie Mae.

“The shift of the starter home inventory toward the rental market reflects, at least in part, a much-needed market adjustment in response to imbalances created by the credit bubble and homeownership boom of the early 2000s,” said Patrick Simmons, Director, Strategic Planning with Fannie Mae’s ESR group. “The shift helped to remove bloated inventories of vacant and foreclosed single-family homes from the market, while also helping to meet exploding demand for rentals created by the economic downturn, foreclosure crisis, and coming of age of the large millennial generation.”

Fannie Mae’s ESR group reported on Tuesday that its forecast for economic growth for 2016 remained unchanged at 1.8 percent. While the labor market has been a bright spot for the economy recently, consumer spending is expected to soften in the third quarter.

“The steady news comes from the labor market, with relatively decent conditions overall,” Fannie Mae SVP and Chief Economist Doug Duncan said. “The biggest doses of bad news come from consumer spending, the linchpin of economic growth, and residential investment, which appears to have posted a second consecutive sizable drop in the third quarter.”

Duncan continued, “Emerging signs of improving homeownership demand among young adults have been encouraging. However, housing activity has lost momentum in recent months. Existing-home sales, new home sales, single-family housing starts, and single-family construction spending declined in August. In addition, pending home sales and purchase mortgage applications weakened during the month, suggesting continued weakness in existing-home sales in the near term amid very lean supply.”

Click here to view the complete Fannie Mae ESR group Housing Insights report.

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.

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